Long Term Vs. Short Term Equity Investments

 

For a salaried or working individual, it is very important to invest to get capital growth on their money. Investing in a timely manner plays a key role in accomplishing that objective as it ensures that your hard earned income is accumulated periodically for good returns and a more fruitful utilization when required.
At present, there are numerous investment opportunities available and each one of them is suited to a separate investment profile as well as saving capabilities.
Based on time-frames, investments can generally be classified into two types: –

1)      Short-Term Investments (3 months-5 years)

As the name suggests, these are investments that can be made in the short term with considerable appreciation of your money in mind. Some of the prominent short-term opportunities are:

• Bank Fixed Deposits

  Considered conventional and very safe, Fixed Deposits is a good option if you have fixed and guaranteed short term returns in mind. With a lock-in period of 1-3 years, different banks offer returns ranging from 6-9.5% annually.

• Non-convertible Debentures/Corporate Deposits (NCDs)

Unlike Fixed Deposits, there is a need for a better financial understanding and having a risk taking appetite while investing in NCDs owing to uncertainty in returns. With that said, the prospective returns are higher than Fixed Deposits and the lock-in terms can be as low as 6 months.

Fixed Maturity Plans (FMP) – With no constraint in the lock-in period, you can invest in FMPs from 3 months to 5 years. These are investment schemes floated by mutual funds and are closed-ended. The assets that a fund households in its investment portfolio for such schemes have similar maturity periods which can give you decent returns with less exposure to market risks. An additional benefit from the tax saving angle is the indexation benefit that you get in FMPs.

• Short Term and Ultra Short Term Mutual Funds

  The investment portfolio in this type of mutual funds is predominantly in fixed deposits and other short term investment assets. Lock-in term is the standard 1-3 years with returns of up to 8%.

2)      Long-Term Investments (Beyond 5 years)

Long-term investments play a crucial role in the bigger scheme of things wherein you might need accumulated amounts; for e.g. for education or buying property. Therefore, it is imperative for you to have a cohesive know-how of the kind of investment option that you are opting for. Here’s an overview of the most common long-term investment options: –

• Employee Provident Fund/Public Provident Fund

Provident or pension fund is a savings scheme offered by a company to an employee in which a small portion of the employee’s monthly salary is deducted and diverted into his Provident Fund which can be withdrawn by an employee on retirement. Apart from this, an employee can also put up to 1 Lakh a year in Public Provident Fund.

 For self-employed individuals, Public Provident Fund is the universal option.
With an interest rate of 8.75% for EPF and 8.7% for PPF for Financial Year 2013-14 , EPF/PPF presents not only a good savings and tax rebate tool, it is also a sensible retirement planning investment.

• National Savings Certificate

  An offering by the Post Offices in India, it is one of the traditional investment tools and highly preferred by senior citizens and those who are looking to invest small amounts for longer lock-in periods. You can invest anywhere from 100/- to 1.2 Lakhs with a 6-year maturity term. The annual interest rate on NSC’s is 8% and not subject to market fluctuations. Also, the interest is not tax-free at the time of payment at maturity.

You can purchase physical NSC’s in denominations of 100, 500, 1000, 5000 and 10,000 and some post offices also have the option of offering them in a Demat form.

• Bonds– Bonds are debt instruments issued by companies and the Government to fund their functional and infrastructural needs as well as fund development initiatives. The inherent risk involved is lesser than equity investments. A good example of a Bond as a long term investment option is the Indian Government 10 Year Bond which is currently giving an interest rate of 8.86% since January 2014.
• Real Estate – Investment in real estate is a very smart investment option as the appreciation in the value of real estate has been very encouraging in the recent years. As an investment option, it represents good growth and is also a substantial asset to have for the later phase of life.
• Equity Shares – Investment in a company/equity entitles you to shares as well as voting rights as a shareholder but this long term investment is a calculated risk. Looking at it from a hypothetical perspective, a company that you invest in might flourish ensuring a high return on equity or might fold up resulting in a major loss. Simply put, it is a long-term single entity investment option that is entirely dependent on a company’s profitability.
• Mutual Funds – The inclination towards mutual funds investments in India is low at the moment and a major reason behind it is the lack of awareness amongst the masses. Mutual Funds are subject to market risks but with investment in a very diverse asset portfolio and professional fund management of your investment, returns on mutual fund investments are favorable more often than not.

Attaining a Balance
As an investor, it is important to achieve a balance in the ratio in which you make short-term and long-term investments. A good understanding of the available options as well as realistically determining your financial needs in the next few years can really help you to allocate your money in short-term and long-term investment options sensibly. That way, you will have sufficient capital for your short-term needs as well as steady growth on your capital in the long term.

Read More

Should You Prepay Your Mortgage Or Invest?

Home loan

The home loan not only offers tax benefits but also helps build an asset that has the potential to appreciate in value – property. The tax benefit is not only available for interest payments but also for principal repayments. Besides, if Rakesh is a first time home buyer, he gets an additional tax benefit of Rs 1 lakh on the interest paid on the home loan. In other words, the home loan should be left untouched. Rakesh should continue to pay the EMIs as and when they become due.
The tax benefit is not only available for interest payments, but also for principal repayments.

Car loan

Unlike a home loan, a car loan does not help build an asset that will appreciate in value. In fact, once the car is purchased and starts being used, it will only depreciate in value. Besides, car loans are expensive. Clearly, Rakesh should repay the entire car loan. If the bank levys a prepayment charge on Rakesh, he should negotiate this with the bank and either have it reduced or cancelled. In any case, even if there is a prepayment charge, he should pay this off and repay the entire loan.

Invest the balance

Now Rakesh will be left with Rs 11 lakh (Rs 15 lakh – Rs 4 lakh used to repay the car loan). He should invest this money. In fact, this money will provide Rakesh security that in case of any unfortunate circumstance due to which he is unable to repay the entire home loan, he can use these funds to do so. Rakesh should invest this money based on his risk-taking capacity and tolerance (either invest in gold, debt, equity, or partly in each of these options).
Endnote
Not all loans are bad. If a loan helps you build an appreciating asset and offers you tax breaks on capital repayments and interest payments, it’s worth holding on to it. However, repay loans that are pure expense loans with no tax breaks.

Read More

Different Types Of Investment Opportunities

 

Every day brings a new twist to the sentiment of Indian investors. If one day the stock market is up 500 points, the next day, it is down by nearly the same amount or even more! Doesn’t this confuse you? Not only this, there are a number of aspects that would be on your mind.

Some of these are –

• The equity market has gone nowhere in the last 5 or 6 years. Even long term investors are losing patience and starting to question the usefulness of equities.
• Gold prices have had wild swings much to the dismay of the average Indian investor who always believed in gold as the “safest” investment.
• Debt mutual funds’ performance took a sudden nasty turn just when investors had loaded up on long term funds in anticipation of the interest rates sliding. This has shaken investor confidence.
• On top of all these woes, investors had to contend with Ponzi schemes and blatant frauds in the commodities spot market.
• Real estate prices have remained unaffordable and even unbelievable in some cases putting them out of the average investors’ reach.

Well, investors are having it tough no doubt. It’s a storm out there with literally no place to hide.

Sticking to investment fundamentals

As with everything else in life, investments too will have their ups and downs. It is the reality after all. There will be good periods and also the bad ones. In this scenario, using a sensible approach is the only way out. Disciplined savings habit, wise investments with adequate diversification and a clearly defined asset allocation pattern based on a financial plan aren’t just bookish gyan to be brushed aside. Just as sound technique is essential for success in cricket, a strong commitment to fundamentals is the secret of investment success.

Investment opportunities

Here are some attractive investment opportunities that you can consider at this point in time.

1. Fixed Maturity Plans (FMP):

   When everyone expected interest rates to fall, it surprisingly rose! This has given an unexpected but excellent investment opportunity. Since interest rates are considered to be at or near the peak now, this is a good opportunity to lock into these attractive rates through FMP. As FMPs have a fixed maturity date, invest for the full tenure of the FMP; this will help you get the prevailing high interest rate for the term of the fund. Depending on your investment horizon, you may choose FMPs with tenure of up to 5 years.

2. Short term funds:

   Bond funds come in a variety of investment terms. There are long term and short term funds depending on the tenure of the bonds that they hold. As short term interest rates spiked recently in response to the RBI measures to stabilize the rupee value, short term mutual funds have been offering attractive returns. Since low tenure bonds and funds experience lower volatility due to interest rate movements, these are good options for a 12 to 18 month investment period.

3. Long term funds:

   Bond funds that invest in relatively longer term bonds would benefit tremendously when interest rates fall. The current high interest rates are expected to fall in the near to medium term. By investing in these long term funds, you not only get higher interest but also an attractive capital gain when interest rates start falling (market prices of bonds rise when interest rates fall). If you can remain invested for more than 3 years and are comfortable with short term price falls and rises, you can consider these funds

4. Equity SIP:

   Most successful equity investors invested when everybody preferred to stay away from equity. There is very little enthusiasm for equity shares among investors now and hence their prices are at an attractive low. By investing regularly in equity funds now, you have the potential to earn attractive returns when the market does turn around eventually in the near future. Systematic Investment Plans are an automated way of investing a fixed sum at fixed time intervals. All it takes is a standing instruction to your bank through the mutual funds scheme and your money would start flowing into the scheme without any further effort. Investing bit by bit through this period of gloom, you not only reduce your investment risk but also enhance your return potential. You may start and more importantly, continue an SIP in a good equity fund.

To conclude, don’t despair! There will always be some investment avenues that would make sense in a given situation. Happy investing!

Read More